$5T opportunity: AI Roll Ups

0:00Over the next 10 years, there's going to be millions of small businesses that are going to get sold because their owners are retiring. We're talking about$5 trillion worth of these businesses. Now, some of the biggest investors in the world, like Thrive and General Catalyst, are already buying them up, and they're using AI agents to make them way more profitable. Now, most people think that billion-dollar funds can only do that, and there's just no room for solo founders or small teams. I don't. I think there's a huge opportunity here for solo founders, and almost nobody's talking about it. I posted about it on X yesterday and it got over a million impressions.

0:38The funniest part was that my DMs and replies were filled with people messaging me to stop talking about it publicly because they think there's so much alpha in this. So obviously, I'm making a whole episode of the podcast about this and you're listening to it. If you stick around until the end, you'll learn three things. You'll learn why this is happening right now and how Thrive and General Catalyst are actually doing it. you'll see exactly how I'd run one as a solo founder down to the folders, the agent files and what my average week would look like and you'll hear the biggest arguments against this including the one I take most seriously I had hundreds of tweets of people who were like yeah, here's what's wrong and I speak to those arguments if you're new here, I'm Greg Eisenberg I run a holding company of my own I host the Startup Ideas podcast and I spend most of my time thinking about which kind of businesses are worth building right now.

1:34If this episode gets 5 ,000 likes, comments, subscribes, I'll give away more of my notes on this whole topic. It'll be in the pinned comment. Now let's get into the episode.

1:52So why is this$5 trillion shift happening right now? And why is there an opportunity? I think three things happen at the same time. And when that happens, you usually get a new kind of business. The first thing is owners are retiring. So that$5 trillion number actually comes from McKinsey. And they expect about a million of those businesses to actually sell by 2035. These are people who started an accounting practice or an insurance agency or property management company. Maybe it's the 80s or the 90s. But they've built this loyal client base over 30 years. And now they want to retire. Maybe their family doesn't want to get into the business.

2:33They don't have people lined up to take it over. Their kids went off and did something else. And their employees usually don't want to run the whole thing. The second point is AI can do the work now. And I say that like, I don't think I could have said this eight months ago, but I'm saying it now. Think about what happens inside those businesses all day. Someone types numbers from a PDF into a spreadsheet and someone chases a client from the same missing document for the third time. Someone writes the same status update like 50 times a week. Not long ago, if you pointed AI at that work, you got a rough draft and someone had to redo it and it was like hallucinating all the time.

3:15Now, if you set it up correctly, you get a draft that somebody checks. And I'm getting to the point, I don't know about you, but I'm getting to the point where I can trust my AI agents and my AI agent systems sometimes way more than my human beings. Like my human beings on my team are making more mistakes than my AI agents. The third piece is service businesses are priced like their margins are stuck. So a normal service firm runs at 5 % to 10 % profit, something like that. and everyone assumes that it'll just sort of stay that way because that's been that way for the last 30 years and that's how buyers value those businesses but when you put all three points together you get a huge wave of businesses about to change owners full of the exact kind of work agents are good at and priced as if nothing about them can change and I think that's one of the biggest opportunities about right now.

4:20So yes, people have talked about boomers and the$5 trillion number I've seen before, but they've talked about it in the sense of like, okay, I'm going to buy this company and then maybe I'll optimize it a little bit. The black swan is the AI agents are actually really, really good right now. So I think that the funds, the big funds have figured this out first. So let me tell you exactly what they're doing. Let's learn from them. And some of these stories are actually really amazing. Okay, so what are the big funds doing? Thrive. Thrive Capital is Josh Kushner's firm. So they were early in companies like Instagram, OpenAI.

5:04And a while ago, they spun out something called Thrive Holdings. And what Thrive Holdings started buying surprised a lot of people because they went out and they bought local accounting firms. Now, they've bought close to 50 of these accounting firms over the last 24 months, and they just committed another billion dollars to buy more. So obviously it's working, right? One of them is a firm in Bellingham, Washington called Larson Gross. It's been around since 1949. They've got five offices and they've got 200 people. After Thrive got involved, the firm started using AI built on OpenAI's codex. I'm pretty sure Thrive has some sort of partnership with OpenAI.

5:49This tax season, it processed 7 ,000 returns. An accountant saved 31 % of their time on average. One accountant had a job that used to take her 180 hours a year, and she got it down to 15. So it's really, really working. And the interns who used to prepare tax returns started training to review them instead. And that's the part I can't stop thinking about. The people who used to do the work are becoming the people who check it. And keep that in mind because it comes back when we get to the arguments against all of this at the end. The other firm is General Catalyst. So they're one of the biggest venture capital firms in the world.

6:34They set aside$1.5 billion for this strategy. and from what I heard, they put more than$750 million into at least 10 companies. One of them is Long Lake, which buys property management companies. They say they've bought 18 businesses and gotten to$100 million in EBITDA in under two years with margins doubling, which is hard to even comprehend. Another is Crescendo, which runs customer support centers. They say AI now handles about 90 % of frontline tickets. And there's one I really like the structure of. So when general catalyst companies buy a business, they usually pay about 60 % to 70 % in cash.

7:23And the founder rolls about 30 % equity into the new company. So the person who built the relationship for 20, 30 years has a real reason to stay and make the handoff go well, which is like a big issue, right? one honest note by the way a lot of these numbers you know when I was doing my research are self-reported by young companies that are raising money and none of them have been through a recession yet so I take them you know so I take them as a strong signal of where this is going not as proof right these it's early days but the thing that I take away from this is when you have thrive in general catalyst both venture firms who i look up to and i think that they're really smart they're putting billions of dollars into the same idea you got to pay attention and if you look at how they're running it there's a pretty clear playbook and a pretty big gap they're leaving for everyone else and that's what i care about like of course you know i hope they do well but i really care about you listening person founder who wants to make their first few million dollars and I want to give you that opportunity or at least get your creative juices flowing to connect the dots.

8:39So I'm trying to analyze their whole playbook, General Catalyst and Thrive. And the simplest way I can describe it is first they build the platform, meaning the agents and the software, before they buy literally anything. Then they buy a firm people already trust. With clients who've been around for years, a lot of the time they like brand names, like good brands. Then they run the agents in the background. So the agents do the work alongside the people and nobody outside sees anything change. If anything, they're more timely, it's more optimized. The customers are hearing back faster and they're getting hopefully better work.

9:26Once the agents are reliable, they move the back office over things like data entry, collecting documents and first drafts and then they buy the next firm and then they plug it into the same platform. So look at what that does to the business. Revenue stays the same because the clients are the same and they're paying the same invoices. Costs go down because agents are doing a big share of the work. So profit goes from anywhere around 5-10 % to, if the thesis holds, to 30 % or 40%. It's basically the same business making three to four times profit. Now, the thing I think most people miss is that the funds need big deals.

10:13If you're a billion-dollar fund, you can't spend your time on a bookkeeping firm doing$2 million a year. It's just too small for them, and it can't move the needle. That's how they think. And the McKinsey number that I gave earlier, about a million businesses are expected to sell. Well, those are mostly small firms. So Thrive and General Catalyst, I don't think that they're going to call them. I think they're going to call the bigger firms or they're going to call the mid-market firms. So the question I kept asking myself is, what does the one-person version of this look like? And let's explore that.

10:51So how would I set up a one-person holdco doing these AI roll-ups? I would set it up as you, the founder. You're at the top. You own a holding company, which is just a company whose job is to own other businesses. That's the simplest way to think about a holding company. Under it, there's a few small businesses. So each one has a GM, a general manager, and usually that's someone who's already there. Think of it as like a senior bookkeeper who's been with the firm for 15 years, knows every client. Then you make her the GM and give her a real piece of the upside. And this bar at the bottom is the part that makes the whole thing work.

11:32Every business uses the same agents, the same rule system, the same back office, and the same dashboards. So you build the layer once, so the second business is easier than the first because half of what it needs already exists. And then the third one is easier. Again, fourth, fifth, you get the idea. At the start, I said there's a huge piece of this pie for solo founders. And there's a few reasons why I believe that. So the tools that you're going to use are the same tools that the funds are using. So Thrive Agents run on Codex. But yeah, you can use Codex, Cloud Code, Gemini. You have access to the same models.

12:15You also get to be the integration. So the hardest part of any roll-up is getting each new business onto the system without breaking anything. So the funds have to hire managers who learn every business from scratch while you're the one in the room. You know the clients and you read the agent drafts yourself. So a lot of owners who would also rather hand their business to a person, if you spent 40 years building something, you care about who takes it over.

12:50Some of them are just not going to want to sell to a large venture capital firm, but they might want to sell to you. And again, that is an edge. And the deals, like we talked about, they're too small for the big funds. So you're not even competing with the general catalyst for them. um you know i've run a hold co now for uh wow six years um almost um actually no six years i've run a hold co for six years um and i just got to say that like who the gm is is going to be such an important part of making this thing work um and i've seen not good gms just not be able to take the business where it should get to and incredible GMs just really fly.

13:46So finding that person is super, super important. And this is pretty much how I think about my own holding company. We have a few businesses with amazing people running each one and they've got a shared layer underneath that keeps getting better and we basically support those businesses. Now, let me show you what that shared layer could look like. This is something that you might want to screenshot. Or like I said, if there's some likes and comments, I could put in the pin comment. So this folder structure is kind of like the org chart. I'll walk you through it so you can clearly understand how I think about this.

14:33The first folder is the thesis. So this is where you're going to write down what you believe, like which industries you're in and why, what a good business looks like to you. And that's going to keep you from buying something just because you got excited about it. The shared folder is that bar at the bottom of the drawing, meaning everything every business uses. So the agents and the global rules live here. there's also a folder of real accepted work that you use to test the agents every time you change something and there are runbooks which are just step-by-step instructions for things that happen more than once like okay it's day one after taking over a business or what you do when an agent sends something wrong that you're going to want to make sure each business has its own folder So the client's file says who's been with the firm for 20 years, who's sensitive, who's loyal to a specific person.

15:37Those details are going to matter. The people file says who knows what. If the senior bookkeeper is the only one who knows how a certain client likes things done, that gets written down here. The rules file holds things that only apply to this business. So maybe this firm always sends reports on the third instead of the first. Because one big client asked for that in like 2011. And the corrections log is where every fix goes. Anytime a person changes something, an agent did it, it gets logged here. If you set up only three files, I'd say set up the global rules, each business rules, and the corrections log.

16:21Because that's the stuff that turns agents into something you can actually trust with a client, right? and even honestly even if you don't do this like don't do an ai roll-up thinking about your business in this way is pretty darn helpful from a structure perspective from getting more out of your ai agents and for just being more ai native so those are the folders let's talk about the agents living inside of them because there's one rule here that i think prevents most of the disasters people worry about. This is how work actually moves through one of these businesses. So when work comes in, the intake agent is going to collect the documents and chases anything that's missing.

17:12That's going to save a ton of time. You have the preparer agent who does the first draft of the actual work. In a bookkeeping firm, what could that be? Categorizing transactions or drafting the months and close, things like that. You have the reviewer agent which checks that draft against the rules. Something's off or something, it sends it back. Then, yes, there's human beings. You still want human beings a part of this. You're going to need a person to approve it. Usually the same person who used to do this work by hand and only after that does it go to the client. I think the most important rule of this whole system is the reviewer can block, but it can never send anything.

18:01And the preparer can't send anything either, by the way. A person always approves before anything reaches the client. Yes, can we get to a point where it's completely AI agents doing everything? Like maybe one day, but I think at this point, you do need to have humans do certain things. and also human beings are the accountability layer for you. I think I'm going to do a whole episode of the podcast about that. But yeah, the person is the accountability layer. I thought it might be interesting for people to see what do these agent files actually look like? Here's one. It's the one for the reviewer.

18:48So you can check it out here. your job, check every draft from the preparer before a person sees it, you score it or pass it to the person or send it back. Here's what you can do, here's what you can't do, check every draft for these things, send it back of this. When you pass it on, so what is this? Basically, I won't bore you with the details, it's basically like a plain English job description. Every agent in the system gets one. And it covers what its job is, what it's allowed to do. more importantly what it can't do and when it has to stop ask a question and get human intervention most of the agent problems i've seen come from nobody telling the agent where its job ends and writing down what it can never do fixes a lot of that um so i think this will be helpful for you so imagine you've rolled up a few of these businesses what is a week you know an average week look like for you?

19:48People ask me about this. And they're, you know, the common feedback I get is it must be so hectic. It's actually a lot less hectic than you think because your GMs and your agents handle the day to day work. So here's how I would spend my week if I own a few of these businesses. On Monday, you want to look at the numbers, you know, for every business, check five core metrics. Number one, profit margin. Two, minutes of human time per job. Number three, how often agent drafts need fixing. Number four, client retention. And number five, whether the key people are happy and staying. A lot of people don't have that, but it's going to be key to the whole system, right?

20:33If profit is going up while clients are leaving, well, something's wrong. You're going to want to catch that early. On Tuesday, I do one call with each GM to hear what's working, what's annoying them, which clients need attention, how you can help. Wednesday, maybe it's your corrections log. I think it's the most important hour of the week because I'd go through every fix a person made to an agent's work and I'd turn the ones that keep happening into rules. you know you can i'll just put up a prompt here show you a prompt compare each agent draft with the version of person approved this week sort every change into factual error client preference missing information or style for any correction that happened more than once propose a rule add each approved rule as a test using the original input and the accepted output and that's how agents get better every week and it just compounds after a few hundred jobs that list of rules becomes the most valuable thing you own because anyone can use the same AI models, but nobody else has your list of every way they go wrong in your kind of business.

21:49And then Thursday and Friday, that's for finding your next business. Coffee with owners, learning a new industry, figuring out what comes next. People ask me about the marketplaces to buy some of these businesses. I think it's Biz Buy, Sell and some other ones. So my experience is once they hit the marketplaces, unless it's super curated, you're not going to get a good deal. The best way to find these deals is to reach out and things like that. The last thing, by the way, people ask me is how do you get the first one? How does the first one start? The path I like to pick one industry, say bookkeeping firms, and I start by selling them a service.

22:37Take one annoying job and do it with agents, like cleaning up month end for their messiest clients or chasing missing documents. And then doing that, you learn how these firms work from the inside. So you're building your agents on real work and you get to meet a lot of these owners. After six months, nine months, 12 months of doing good work for a bunch of firms, one of those owners is going to be ready to step back and you'll be the obvious person to take it over. So you start by serving them, you earn their trust, and eventually you own one. That's how usually these things happen. Okay, so when I posted this to X, like I said, I had actually in my DMs several billionaires, several of the biggest firms just wanted to talk more about this with me.

23:28and then I had a bunch of people being like, keep this quiet. But then I had a ton of quote retweets, plenty of smart people telling me why this won't work. Some of them have a point or there's a reason why I understand where they're coming from. So I wanted to do a lightning round of some of the common complaints about doing AI roll-up. so the first thing that you know i saw a lot of is roll-ups always fail this is private equity with an ai sticker on it a lot of people saying this is just private equity this is private equity and a lot of a lot of private equity fails so yes a lot of roll-ups do fail but they are almost always fail for the same reasons like they overpay or they buy faster than they can integrate or the culture falls apart.

24:23And yes, AI doesn't fix any of that on its own. That's actually why the one-person version or the small team version, you buy slowly, you're the first one doing the integration and you price the business on what it makes today instead of paying the seller for the AI upside you're planning to create. So I understand where this is coming from, but it's like saying don't do startups because most startups fail. The second thing that I heard a lot of is once everyone uses AI, the margins are going to get competed away. Eventually, probably yes, but there's a window between when your costs drop and when prices in your industry catch up.

25:09In a lot of these industries, that window is actually years long. It's not like a month. The stuff that keeps clients around, like 20 years of relationships and your own list of rules for how the work gets done it's actually harder than people think to copy the third thing I heard a lot of was these are regulated and high stakes businesses you need human beings checking everything there's no savings yeah you need human beings in some industries you need human beings checking everything but checking a draft takes a lot less time than making it from scratch and remember we're talking about Larson Gross's 31 % margin well that's where that came from the people are still there but what they spend their day on is different and now they have just a whole lot more leverage it's basically like you're adding leverage not in the financial leverage sense, like in the productivity sense of the word.

26:18They're just way more leverage to do stuff. Fourth thing that people were saying was, people hate change, the staff and the clients are going to leave. I take this the most seriously. Some will, and that's why the first 30 days changed nothing the clients can see, why the agents run in the background before they touch anything real, and why the person who knows every client becomes a GM with a real piece of upside. So you want to really incentivize your senior leadership. I think that's really important. I'll do one last one. A bunch of replies saying, this is a fancy way of saying layoffs. And I get why people feel that way.

27:02It's a fair question to ask. But what the early examples show is people are shifting from doing the work to checking it and each person is handling more clients than before. So we talked about that with the interns at Larson Gross. I'd be lying if I said no jobs are going to change. A lot of them will. And then the question becomes like, okay, if you've now evolved your role, some people are going to be good in that new role. Some people are going to be just satisfactory and some people are just not going to be meeting expectations. Those people are going to probably get laid off. We haven't seen a lot of that yet, but I expect it will happen.

27:43Yes, so overall, the TLDR on some of the replies I got, there are real risks with this type of business and business model, but none of them change my mind about the size of the opportunity. And none of it changes my mind about how you approach the opportunity. so that's kind of how I see this $5 trillion AI roll up opportunity I think it's a huge deal it's happening the early stories are remarkable and I do think that like I said there's tons of businesses that are too small for these big funds I think this idea of a one person hold co or small hold co is really interesting. Few good businesses, a great GM running each, a shared layer of agents and rules underneath that gets better every week.

28:42If people want to hear more about these types of businesses, hold co is, I call it multi-preneurship. This idea of entrepreneurship is obviously you're starting businesses. And multi-preneurship is when you own multiple businesses. I think it's a huge opportunity. I think you can cash flow it. And I hope this episode got the creative juices flowing. Like I said in the intro, I can expand on this and I can put it in a pinned comment. I can put out the folder structure, the agent files, any prompts in there. If that hits 5 ,000 likes, comments, and subscribes, I'll put in the pinned comment. And if you start one of these businesses, tell me because I generally love to hear about it.

29:29I love doing these videos and I love putting out the alpha and although I might get some haters for it for me it's worth it because I think if it changes the lives of a few it's absolutely worth it this has been really fun and I'll see you in the next one take care